Digital Ally (DGLY) Penny Stock Case Study

The month of January is in the books, one of the best starts for stocks since 1987. And to be honest, I’m a little surprised…after such a brutal end to the trading year…which included the Dow suffering its worst Christmas Eve ever.

That said, I’ve practically doubled my $200K account this month.

dgly case study

No. I’m not doing anything new. Just trading three simple to learn trading patterns. Most of the companies I trade are penny stocks, so you don’t need a large account to get started.

Some people will knock penny stock trading because they think it’s for small-timers. However, I don’t know too many people making this kind of cheddar…  

But here’s the thing… you can do it too. I’ll teach you which patterns to look for, catalysts to play, and where to find value.  

For example, just yesterday I snatched over $7K trading Digital Ally (DGLY).

That said, here’s the step-by-step breakdown on this catalyst trade. Pro Tip: If you want to improve your trading fast, study winning trades if you don’t have any, find a mentor.

Case Study: DGLY Trade

The reason why I trade penny stocks is that they move. It’s common to see penny stocks move 10-20% on a given day, sometimes significantly higher.

That said, in order for these stocks to have large swings, there needs to be a catalyst. A catalyst is an event that triggers stocks to have above average price moves.

And when it comes to Digital Ally, Inc (DGLY) it was all catalyst-driven.

Here’s a summary of the story that made me believe we’d see a spike in the stock:

Digital Ally produces and sells digital video imaging and storage products for law enforcement and security. You have heard about them before, as they’ve gotten buzz in the past for their body-cams.

Here’s a look at the daily chart.

dgly chart patterns

If you look at the daily chart above, there was a lot going on in DGLY. First, the stock had a sizeable gap down in late September 2018. The stock has more, or less, been trading in range over the past few months.

However, it was starting to make a move higher, making higher lows – as shown with the blue uptrend line. Consequently, I figured this stock could potentially break above the blue horizontal line and get some momentum if it filled the gap. All the stock needed was a catalyst event… and there would be a high probability it would get above $3. (Spoiler alert – there are actually three potential catalysts). That said, I’ve been looking at the newswire and any signs that may send DGLY into the gap and break above the purple line.

Now, here’s some background information surrounding Digital Ally.

Digital Ally (DGLY) Background Information

What goes around comes around! The Taser was welcomed by our law enforcers as an alternative for the ultimate gun. Jack Cover, a NASA researcher, began developing the Taser in 1969 and finished it by 1974.

After his initial idea, Axon (NASDAQ: AAXN) (formally called TASER Technology) made improvements to use air pressure instead of gunpowder as its fuel.

This improvement removed its classification as a firearm and necessary regulation related to being a firearm. Axon produces and sells the Taser gun. However, with its success came copy-cats. Therefore, the firmed filed patents to guard off counterfeiters.

Ironically, Axon uses a technology patented by someone else, namely the auto-activation technology from Digital Ally.

DGLY actually detected this counterfeit and filed a patent infringement case in January 2016, alleging that body-worn camera products sold by Axon violated Digital Ally’s patent. 

Since 2016, there’s been an ongoing court battle, as Axon tried to invalidate the patent but lost all its efforts at the end of October last year, and a trial date was set for January 26, 2019. Even before this trial, AXON decided to abandon its appeal on December 20, 2018, and discontinue all remaining attacks against the patent.

After the trial, Digital Ally’s CEO, Stanton E. Ross stated,  We were excited to meet with the Court and discuss the trial. We were glad to hear that both parties were looking to set a trial date. We are looking forward to the judge setting that date and moving forward to present our case to a jury.”

Tension is building in this case as we are getting closer to a final outcome. The ruling could, however, be in favor of either party, but all past attempts of Axon to avoid a trial hints that they are not comfortable to defend their case before a jury. This case could come straight from the Netflix series “Suits”!  

Although I’m not really interested in the actual outcome of this trial, I’m still focused the news coverage in the coming weeks.

Now, here are the actual catalysts.

DGLY Catalysts Could Send the Stock Even Higher…

1) Setting the trial date

During the pre-trial, the judge mentioned he will set a trial date shortly. The last time the judge set a trial date, it was nearly 3 months away: at the end of October, he set the trial date January 16, 2019. If we apply the same period, the time could be around April 2019, but this isn’t as important when compared to the actual announcement of the date. This makes it an official jury trial! We expect the decision in the coming weeks or even days.

2) AAXN filing an 8-K

Until now, Axon has not informed its investors in any formal 8-K filing. Since AAXN is listed on Nasdaq, it’s required to file an 8-K every time there is news that could have a potential impact on the investors. If a trial date is set soon, Axon is obligated to start sharing information and the potential negative impact of it.

3) Digital Ally potential takeover

An obvious way for Axon to avoid paying the litigation is to take over Digital Ally. Digital Ally has a market cap of approximately $29M, whereas Axon’s is approximately $2.85B. A small investment of $10M would be enough to avoid a damage claim of potentially around $800M. Digital Ally’s management team is fully aware of this and considered the option to implement a so-called “poison pill.”

You’re probably wondering, “What’s a poison pill? Why would DGLY want to use that?”

Well, a poison pill is actually used by companies that want to prevent hostile takeover attempts. Basically, DGLY could use the poison pill tactic as a defense mechanism to make its shares unfavorable for AAXN. By using the poison pill strategy, DGLY would significantly raise the acquisition cost. Consequently, this could send its shares higher.

Digital Ally Chief Financial Officer (CFO) noted, “We actually tried to put in a blank check preferred stock feature, which could be used for the poison pill, by the way, back in — at the annual meeting this year. And it was — it got an overwhelming majority of those that voted, but we did not get a quorum for that kind of issue to pass. In the annual meeting, you have to have 50% of all shares outstanding, not just 50% of those that voted. And we weren’t able to reach the quorum level to get that thing passed. So we sure wish we have that in our arsenal. We don’t have that”

That said with three catalysts in play, there was a high probability the stock could run higher.

Here was my thesis.

Digital Ally Trade Thesis

There is a high likelihood that all 3 catalysts should hit, even in the listed order. The negative news of the PGA tour didn’t even budge the price making us believe no one is willing to sell.

The potential damage claim of $800M they could win is probably a reason!

Now, DGLY’s price was at an excellent level, setting up for a bounce back to $3 and above with the first level of support around $2.50 and more extended time support around $2.

This leaves me with only one advice for Axon, just pay $10 per share for DGLY, and your pain will go away .. “You ALWAYS have a choice” (Harvey Specter, Suits)

Now, I alerted Millionaire Roadmap members about my moves in DGLY.

digital ally trade alert

Well, in just a few days… we got what we asked for. Digital Ally issued a press release about the court order details of its litigation against Taser, now known as Axon Enterprise.

Digital Ally’s CEO noted, “We have been exceedingly patient as this legal process has played out and we are excited that the issuance of this Pretrial Order puts us one step closer to trial…We are confident the jury will see Axon’s conduct for what it is—an attempt to capture the marketplace and drive us out through the willful infringement of our patented auto-activation technology.”

Here’s what DGLY did after this news hit the wires…

dgly chart patterns

The stock broke out, and I was taking profits, not chasing it like many traders.

Now, I had a few buys and sells in DGLY… but by the end of it, I locked in over $7K and I’m flat in the name. However, I don’t think this trade is done just yet… court procedures take a while to materialize, so I’ll be keeping this name on my radar to see if it will pull back and uncover other buying opportunities.

That said, this stock is still in play. You see, a lot of times the moves won’t happen when you think they will, the stock market is tricky that way. However, these stocks are generally always worth coming back to… that’s why I’m not frustrated if I have to take a stab at them more than once before I hit the big winner.

The diary of a real $ trader,


Jason Bond
JasonBondPicks.com

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